Citi Lawyer Cites Mystery Bank He Says Made Even Bigger Flub

A lawyer for Citigroup Inc. told a federal judge on Friday he was aware of another big bank that had recently made an even larger payment error than its own $900 million transfer to Revlon Inc. lenders.

The lawyer, Neal Katyal, dropped the bombshell at a hearing in which Citibank urged the judge to extend a freeze on more than half a billion dollars it wired asset managers for Revlon creditors last summer -- an epic back office blunder that led to a closely watched trial. Some of them returned the money, and Citibank unsuccessfully sued 10 others for the $504 million they refused to give back. The judge froze the funds during the dispute.

Katyal never identified the other bank after alluding to it on Friday. The hearing centered on whether the freeze would continue. The judge didn’t rule.

“The toothpaste can’t be put back in the tube,” Katyal told U.S. District Judge Jesse Furman in Manhattan by video conference. “There’s no guarantee this can be fixed later” if Furman releases the money and Citibank wins an appeal it filed shortly after the judge ruled for the defendants in February.

‘Lottery-like Windfall’

The asset managers Citibank sued -- which include Brigade Capital Management, HPS Investment Partners and Symphony Asset Management -- have asked the judge to lift his injunction on the money, saying they received exactly what they were owed and should be free to use the cash as they wish. Citibank argues that the money “represents a lottery-like windfall” to the creditors and may not be recoverable, or even traceable, if it’s distributed to investors around the world.

To stress that point, Katyal invoked the implosion of Archegos Capital Management, the investor Bill Hwang’s family office, which went from relative obscurity to Wall Street infamy in a matter of days following a series of wrong-way bets on Chinese technology and U.S. media companies. He told Furman that the collapse of Archegos is just more proof that the Revlon lenders can’t guarantee they’ll return the money to Citibank if it’s unfrozen and the bank then wins its appeal.

Just two weeks ago, Archegos could have said “it was one of the most respected institutions in the world -- and poof, in a flash that disappears,” Katyal said.

Adam Abensohn, a lawyer for the funds, pushed back against the argument that Citibank would suffer irreparable harm if the injunction on the money were lifted.

“As long as you’re dealing with solvent institutions, they’re not at risk of being able to collect,” he said. “There has been no suggestion, nor could there be, that the lenders are playing three-card monte.”

Tougher Sell

Citigroup said the money must remain locked.

“While many lenders have recognized the payment was in error and returned several hundred million dollars, we were forced to take other lenders to trial,” Danielle Romero-Apsilos, a spokeswoman for the company, said in a statement on Thursday. “Those funds sent to those lenders have been frozen by court order, and we are seeking to have that freeze continue through our appeal. We believe we have strong arguments on appeal.”

Quinn Emanuel Urquhart & Sullivan LLP, which represents the asset managers, declined to comment on the case.

In his surprise ruling in February, Furman found that the firms shouldn’t have been expected to know the wire transfers were an error.

Keeping the funds on hold will be harder for the bank than it was earlier, said Elliott Stein, a senior litigation analyst at Bloomberg Intelligence.

“Citibank won a freeze of the funds before the trial but may have a harder time extending that freeze now that it lost at trial,” he said. “One of the key elements -- showing that Citi would be irreparably harmed if the freeze is lifted -- may be applied more stringently post-trial.”

Higher Stakes

For Citibank, the stakes may be even greater than the sum it sued to recover. Some of the money managers that gave the cash back did so provided that they be treated like the others and that Citibank return the funds to them if the bank lost the case, according to people with knowledge of the matter.

Stein said he was “skeptical at this point” that those firms would prevail in recovering the money they returned to the bank.

“Just like Citibank has had to suffer the consequences of its mistake, so too those funds might have to suffer the consequences of their error in not initially recognizing their legal rights,” he said.

It will depend on “the paperwork and releases between the lenders and Citi that accompanied the return of the funds,” said Braden Perry, an expert on legal and regulatory matters who has followed the case.

“Generally, if there was a liability release, that’s legally binding and usually states that you are performing some action -- here the return of the funds -- and that you agree not to take any further legal action,” he said. “But again, these will be specific between the lender that returned the funds and Citi.”

Furman’s February decision has already led to changes, prompting language in loan deals that would require investors to return the money in case of a similar mistake.

The case is Citibank NA v. Brigade Capital Management, 20-cv-6539, U.S. District Court, Southern District of New York (Manhattan).

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